Institutional theory is the most dominant approach to understanding organizations (Greenwood, Oliver, Suddaby, & Sahlin-Andersson, 2008). Traditionally, scholars in organizational theory viewed organizations as “agentic” actors responding to “situational circumstances” by interpreting their contexts and taking actions. Together with other views like resource dependence theory, structural-contingency theory and behavioral theory of the firm, all these views tried to understand how organizations rationally adapted or reacted to a more or less fixed context or environment (ibid). The assumptions on which the organizational context were founded came from more of an economist tradition, and context was treated mostly as a market or “technical setting” (Greenwood et al., 2008).
Seminal papers in what is now called neo-institutionalism (or new institutionalism) were written in the late 1970s and early 1980s (Greenwood et al., 2008). These papers promoted the idea that organizations are influenced by their institutional context. According to Scott (2014), the focus on the cultural elements differentiates neo-institutionalism as it focuses on “shared conceptions of what constitute the nature of social reality [that] can create the frames through which meaning is made” (Scott, 2014, p. 67). This marked a shift away from the traditional view outlined above about how scholars viewed organizations (Greenwood et al, 2008). Over the next decades, a wide range of perspectives were explored and ambiguities emerged in the field, but “Scott (1995) brought order to the various strands of institutional analysis by distinguishing between the regulative, normative and cultural-cognitive […] elements that underpin institutions” (Greenwood et al., 2008, p. 15).
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We draw upon Scott (2014) and his analytical framework in order to explain both how risk appetite is shaped by institutional pressures and how it is institutionalized. Scott’s pillars has become one of the “most-cited contributions in the institutional literature” (Greenwood et al., 2008, p. 15) as he attempts to establish a relatively broad definition of institutions by gathering a number of ideas that have been proposed by scholars in the field of institutional theory (ibid).
Scott’s contribution was to sort these into the regulatory, normative, and cultural cognitive systems, also referred to as the three pillars of institutions (Scott, 2014).
3.1.1 Analytical framework: institutional pillars
Scott (2014) defines institutions as comprising “regulative, normative, and cultural-cognitive elements that, together with associated activities and resources, provide stability and meaning to social life” (p. 56). Important aspects of institutions and organizations are people and behavior. Institutions have an ability to both control and restrict human behavior through, for example legal and moral boundaries, and “institutions provide stimulus, guidelines, and resources for acting as well as prohibitions and constraints on action” (Scott, 2014, p. 58). In other words, the institutional pillars are building blocks of institutional structures, which guide behavior and resist change (ibid).
Previous scholars in the field of institutional theory have often chosen to place their emphasis on only one of the three different “pillars” of institutions and highlighting one as the most important ingredient of institutions. However, Scott (2014) choses to include all three pillars and focuses on identifying the similarities and differences between them, and argue that more than one pillar may be at play simultaneously. In general, the pillars form a continuum ranging from the conscious to the unconscious, from the legally enforced to the taken for granted (Hoffman, 2001).
These institutional effects can be observed both within and outside of the organization (Palthe, 2014). Even though Scott (2014) has identified six levels of analysis, we only distinguish between institutional pressures that stem from within the organization from those outside the organization, as suggested by Klovienė (2012). Distinguishing an internal institutional factor from an external depends on whether the institutional factor “performs” irrespective of an organization, or if it depends on the reaction of the organization (ibid).
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The regulative pillar places emphasis on formal rules, monitoring and “explicit regulatory processes” (Scott, 2014, p. 59). Regulatory processes “involve the capacity to establish rules, inspect others’ conformity to them, and, as necessary, manipulate sanctions – rewards or punishments – in an attempt to influence future behavior” (Scott, 2014, p. 59). Regulatory systems constrain behavior through the formalization of rule systems, which specify required conduct in an unambiguous fashion (ibid). Moreover, there is an instrumental rationale behind the regulatory pillar (Scott, 2014). Organizations craft laws and rules that they believe will advance their interests, and the individuals of the organization conform in order to avoid sanctions or seek rewards (ibid).
The regulatory pillar is less salient if laws or rules are “sufficiently controversial or ambiguous that they do not provide a clear prescription for conduct” (Scott, 2014, p. 62). Ambiguities are interpreted by organizational actors and rely on other institutional elements, such as culture or norms, rather than regulatory elements to have behavioral effects (ibid).
The normative pillar comprise normative systems that can constrain social behavior, but also empower and enable social action (Scott, 2014). For the normative pillar, both values and norms play an important role in determining appropriate behavior in an organization (ibid). Values are conceptions of a preferred or desired outcome with standards to assess behavior, whilst norms specify how things ought to be done, i.e. define legitimate means to pursue valued ends (ibid).
Normative systems define and set different goals for the organization, but normative systems also define the means by which the specific end or goal can be reached. Normative systems give rise to roles, as not all values and norms “are applicable to all members of the collective”
(Scott, 2014, p. 64). Normative systems emphasize the logic of appropriateness, which implies that organizational actors evaluate the appropriate behavior given his or her role and the situation (ibid).
Cultural frameworks and symbolic processes are important as they work to “define the nature and properties of social actors and social actions” (Scott, 2014, p. 68). However, not everyone in an organization holds the exact same beliefs, and the degree to which cultural elements are embodied in, for example routines, will have an impact on how institutionalized cultural elements become (Scott, 2014). Yet, the most important element in the cultural-cognitive pillar
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is the “role played by the socially mediated construction of a common framework of meanings”
(Scott, 2014, p. 70). In other words, the shared understanding that is constructed through interactions between actors in the organization creates compliance through that shared understanding (ibid).
3.1.2 Institutional pressures
DiMaggio and Powell (1983) identify three forms of institutional pressures that shape organizational behavior –coercive, normative, and mimetic. These are pressures towards isomorphism, i.e. pressures toward accommodation with the outside world (ibid). This concept of institutional isomorphism is included in Scott’s (2014) institutional pillars, and is a useful tool for understanding modern organizational life (DiMaggio & Powell, 1983). In light of Scott (2014), these pressures are thought of as mechanisms of control of organizational behavior and that these are distinctive for each respective institutional pillar, i.e. coercion is attributed to the regulative pillar, normative is attributed to the normative pillar, and the mimetic pressures are attributed to the cognitive-cultural pillar (ibid).
Coercive pressures stem from both formal and informal pressures exerted on organizations by other organizations by which they are dependent (DiMaggio & Powell, 1983). Coercive pressures can be “felt” as a force to respond to a political decision or mandate, e.g. conformity with governmental standards (ibid). Coercive pressures can also occur outside the governmental arena, for example in a group where subsidiaries need to be compliant with the policies of the parent corporation (ibid). In light of the institutional pillars, rules and laws indicate such pressures, and the basis of compliance for such coercive pressures is expedience, i.e. to say that compliance happens in order to avoid sanctions (Scott, 2014).
Normative pressures come from what DiMaggio and Powell (1983) call professionalization.
Professionalization is defined as “the collective struggle of members of an occupation to define the conditions and methods of their work […]” (p. 152). Formal education and professional training can create normative pressures as they promote normative rules about organizational and professional behavior (ibid). In light of Scott (2014), normative mechanisms can be coupled with a social obligation to comply with such normative rules. Furthermore, indicators of the normative pillar can be certification or recognition from the professional community (ibid).
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Mimetic pressures are primarily a result of uncertainty (DiMaggio & Powell, 1983). That is, when an organization faces a problem with ambiguous causes and unclear solutions, a problemistic search is set in place (ibid) and develops a shared understanding or a set of collective meanings that condition how organizational actors interpret and respond to the world around them (Scott, 2014). The basis of compliance for mimetic pressures is therefore a shared understanding or a “taken-for-grantedness” (ibid). Furthermore, the prevalence of a set of common beliefs or shared logics of action are indicators of mimetic pressures in the organization (ibid).
The combination of the institutional pillars (Scott, 2014) and institutional pressures can summarized in the following table. The table is a slightly modified version of Scott’s (2014) table for the three pillars of the institution.
Table 2 Institutional pillars and pressures
Regulative Normative Cultural-cognitive
Pressures Coercive Normative Mimetic
Basis of compliance Expedience Social obligation Taken-for-grantedness
Shared understanding
Institutionalization is a process that happens to an organization over time (Selznick, 1957) and is the emergence of “orderly, stable, social intergrading patterns out of unstable, loosely organized, or narrowly technical activities” (Selznick, 1992, p. 232). The rationale is that institutionalization is “the social creation of reality” (Berger & Luckmann, 1967, p. 15). The first step in institutionalization is the creation of formal structure that provide an “institutional”
solution to problems of coordination (Scott, 2014), e.g. explicit goals and rules in the organization (Selznick, 1992). The second step is the process of making the institutional solution a part of the social reality (Scott, 2014). “Thick” institutionalization is a term used for organizational solutions that have a broad institutionalization in the organization, i.e. the pillars support and reinforce one another (Selznick, 1992).
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In answering questions such as how institutionalization occur, Scott (2014) states that the typology of DiMaggio and Powell (1983) is useful as it “focuses attention on three contrasting mechanisms – coercive, normative and mimetic – that identify various forces or motives for adopting new structures and behaviors” (Scott, 2014, p. 158). As previously mentioned, these forces or motives for adopting new behavior are arrayed in line with the three pillars of the institution.